Compliance

FTC Calls on States to Lift Direct-to-Consumer Sales Bans

LANSING, Mich. — The debate over whether motor vehicle manufacturers should be allowed to sell directly to consumers in the state has resurfaced after last year’s passage of a law that added tighter restrictions on direct-to-consumer sales. This time, the Federal Trade Commission has weighed in.

Reigniting the debate over direct-to-consumer sales of motor vehicles is a bill, S.B. 268, introduced on April 15 by Sen. Darwin L Booher (R-Evart, Mich.). The legislation, which is currently being considered by the Senate’s economic development committee, would allow Elio Motors and other manufacturers of three-wheel “autocycles,” to choose whether to sell directly to consumers, through dealers or through a combination of the two.

The legislation comes after last October’s controversial passage of legislation that was originally intended to prohibit vehicle OEMs from dictating fees a franchised dealer can charge customers. But thanks to a procedural loophole, state lawmakers were able to toss in a last-minute amendment without public comment or debate. And that amendment reinforced the state’s prohibition on selling vehicles directly to consumers, effectively banning Palo Alto, Calif.-based Tesla Motors, which called the law a “raw deal.”

Michigan Governor Rick Snyder urged lawmakers after signing the bill to discuss whether the franchise system and the state’s ban on direct-to-consumer sales were good for state consumers. “We should always be willing to re-examine our business and regulatory practices with an eye toward improving the customer experience for our citizens and doing things in a more efficient and less costly fashion,” he said at the time.

In January, Elio Motors rolled into Michigan to show off its new autocycle. Booher introduced his measure after Elio announced plans to build its three-wheelers at a former General Motors Plan in Shreveport, La., starting next year. He also requested comment from the Federal Trade Commission.

The federal agency responded in an 11-page letter issued to Sen. Booher on May 7. In the regulator's view, according to the letter, “the bill does not go far enough.” It was signed by Marina Lao, director of the Office of Policy Planning, Deborah Feinstein, director of the Bureau of Competition, and Francine Lafontaine, Director of the Bureau of Economics.

“Rather, the narrow scope of the bill would largely perpetuate the current law’s protectionism for independent franchised dealers, to the detriment of Michigan car buyers,” read the letter, in part. “FTC staff believes Michigan’s consumers would more fully benefit from a complete repeal of the prohibition on direct sales by all manufacturers, rather than the enactment of any limited, selected set of exceptions.”

The FTC did not offer an opinion on whether the franchise model was superior or inferior to direct-to-consumer sales, but it did urge Michigan lawmakers to allow consumers to choose which vehicle they want and how to buy them.

The letter also noted that Elio Motors has accepted more than 41,000 reservations for its vehicle as of March 29. The company, the letter continued, also plans to have Pep Boys handle warranty service, as Elio does not intend to establish a dealer network.

On May 11, the FTC posted a blog authored by Lao, Feinstein and Lafontaine. It called on other states to lift bans on direct-to-consumer sales of motor vehicles. “FTC staff supports the movement to allow for direct sales to consumers — not only Tesla and Elio, but for any company that decides to use that business model to distribute its products,” the blog post read, in part. “Blanket prohibitions on direct manufacturer sales to consumers are an anomaly within the larger economy.

“Protecting dealers from abuses by manufacturers does not justify a blanket prohibition like that in the current Michigan law, which extends to all vehicle manufactures, even those like Tesla and Elio who have no interest in entering into a franchise agreement with any dealer.”

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